Chinese Solar: First Bond Default Likely Tomorrow

We're mere hours away from the likely default of one of the largest solar manufacturers in the world: Suntech Power . The latest news reports have bondholders forcing the company into an involuntary bankruptcy tomorrow if the company doesn't pay back $541 million in bonds. If that takes place it would be the first default for a bond issued by a company from mainland China.

The likely default has implications for Suntech as well as many other companies in the solar industry.

What happens to Suntech?
In all likelihood, Suntech will go into some sort of default tomorrow. It's likely that stockholders will be wiped out and bondholders will be heading to court to try and retrieve some assets. But it's possible the company will survive in some form.

What we know for sure is that the central government or state-run banks won't be running to Suntech's rescue. If that were to happen it would have been done by now. Rumors are that the local Wuxi government will use its multi-billion dollar fund to bailout local manufacturing for Suntech. As I've said before, China's government is more concerned with employment than losing money, which is why local governments have helped LDK Solar and it looks like Suntech is next.

If the company does continue making panels it will be interesting to see how customers respond to a company that was losing loads of money, was mismanaged, and now had to be bailed out by a local government. If Suntech's finances were bad as a well-known public company, then I would hate to see how much it loses under government control.

What about the rest of Chinese solar?
The real fun begins when we think about the future of the giant Chinese solar industry. China's new government has said that consolidation in solar is necessary and it will allow companies to combine or fail but this is the first indication that they'll actually let that happen. Even in the past few weeks investors thought a white knight would arrive to save Suntech.

This has huge implications across the industry because Chinese solar manufacturers have billions of debt that they can't possibly refinance on the open market or fund with money-losing operations. JA Solar has convertible bonds due in May, Trina Solar has convertible bonds due in July of this year, and LDK Solar has bonds due in February of next year. Each of these companies could potentially face the same challenges Suntech has had to face this week.

For those of you who have followed my solar coverage on over the past year, you know I've said over and over again that highly indebted Chinese solar companies are incredibly risky and worth avoiding at all cost. If you must play in Chinese solar, do it with a less leveraged company like JinkoSolar , which is at least less likely to default in the next six months. Personally, I would stay away from Chinese solar altogether.

Foolish bottom line
It doesn't look like Suntech's likely bankruptcy will take the company entirely out of the industry but it's a step in the right direction for healthier competitors. The industry has about 70 GW of capacity and only about 30 GW of demand, so more manufacturers are going to have to go under before margins increase and we see anything close to a profit.

This is another reason to stick with U.S. solar manufacturers. They're not as sexy from a cost standpoint but they're much healthier financially, and it looks like the free flow of money from China is going to come to an end eventually.

One of those U.S. companies to watch is First Solar. Investors and bystanders alike have been shocked by First Solar's precipitous drop over the past two years. The stakes have never been higher for the company: Is it done for good, or ready for a rebound? If you're looking for continuing updates and guidance on the company whenever news breaks, The Motley Fool has created a brand-new report that details every must know side of this stock. To get started, simply click here now.

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Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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